When A Blue-Chip Stock Suddenly Isn’t

Many self-directed investors like to buy blue-chip issues: high-value stocks that regularly pay dividends, and whose companies are so integral to the global economy that holding them seems as safe as putting money in the bank, with much better returns practically guaranteed.

         Not so fast.

         In 1999, we got a stark reminder of the fallacy of such assumptions. It took down a company whose divisions were so ubiquitous across the American landscape that they conjured a sense of permanence rivaled only by major geographic features. There was the Mississippi River. The Rocky Mountains. The Grand Canyon.

         And there was General Electric.

         For 111 years, GE was one of the several companies whose performance was gauged by the Dow Jones Industrial Average (DJIA). It practically defined the term “blue-chip stock.” Yet in June of 2018, it was removed from the DJIA, and as I write, GE stock sits at less than 25 percent of its August 2000 high. Some are now wondering if the company itself will survive.

         What happened?

         Across those years on the Dow, GE successfully diversified into smaller sub-companies within the (much) larger parent organization. Those multiple business lines touched, quite literally, every sector of the global economy. GE’s wide range of markets was a primary reason it kept its place on the Dow.

         It was also why many saw GE as a no-lose investment. In one company, they reasoned, they could achieve the kind of diversification that assures stability in bad times and growth when times are good. Those who work for a titan of industry like GE, and acquire company stock regularly as part of their 401(k), can be even more susceptible to notions of “their” company’s invincibility.

         And thus the trap is set. I refer, of course, to the all-your-eggs-in-one-basket trap.

         General Electric stock began a steady climb in the mid-90s, topping out in August 2000 at $58.17 a share—a more than threefold increase in just over three and a half years. But what the average self-directed investor did not know was that the majority of GE’s profits were coming from just two of its divisions. It only took the failure of only one, its financial services side, for GE’s share value to plummet.

         Those heavily invested in the company paid dearly. I share the story of one such investor in my book, “You’re Retired. Now What?” It also details the contrarian approach I take to structuring strategic investment portfolios which are truly diversified. It is no easy job, but I do it with one objective in mind: protecting and growing my clients’ wealth.

         You can learn more about the book here.

The Fiduciary Standard—What It Is, and Why It Matters

If it feels like you’ve been hearing the term “fiduciary standard” more often lately, you’re right. The reason? The death of a federal rule, which took effect in April 2017, but was vacated on appeal in early 2018. The rule extended fiduciary protections to small investors saving for retirement.               

         Despite its legalistic overtones, the fiduciary standard is far less complex than it sounds. In the case of this now-dead rule, it simply meant that financial industry professionals who advise clients on how to plan and save and invest for their retirements were legally bound to do so with their clients’ best interests at heart.

         The rule aimed to expand to “fiduciary” the prior standard, which required financial advisors to provide only “suitable” advice. 

         Think of the difference between the two this way: That donut spare tire that comes standard with new cars is suitable; it will get you down the road to a service center, where you can get the real thing. (Just don’t exceed 50 miles per hour!)

         But you’d surely feel safer—and be able to go much further—on a regular, full-size tire.

         Similarly, advisors working to the fiduciary standard aim to help individual investors meet not only their short-term objectives  but also to enjoy comfortable retirements as well, whatever that means to them.

         As written by the Obama administration, the fiduciary rule protected people saving for retirement from financial advisors with clear conflicts of interest. That could mean recommending a stock or bond or annuity or other vehicle in order to reach a sales quota and benefit personally, rather than because buying it is in the best interest of their client.

         If protecting people who are saving for retirement from those more interested in their own success than in the buyer’s goals seems like common sense, I agree. Don’t ask me to explain why the rule was overturned in court, because I find it both inexplicable and inexcusable—if, as a nation, we are truly interested in preventing the financial services industry from taking advantage of small investors.

         But let me climb off of that soapbox and onto this one: Despite the game of legalistic football being played over protecting individual investors, there are investment and wealth advisors who embrace and work to the fiduciary standard anyway, every day—because our personal ethics won’t let us even consider doing otherwise.

         I’m extremely proud to be one of them, and the “A.I.F.” behind my name (it stands for Accredited Investment Fiduciary®) indicates it.